Deals such as Omniture and Mint.com are larger transactions with higher revenue multiples.

There has been a slew of big M&A deal announcements in the tech sector the past week (Mint.com, NetOsQ, Omniture) and it certainly makes us feel even more comfortable for deals in Q4 as we near the end of September. This quarter as a whole has brought 15 big deals (over $100 million) and some of the highest multiples since the beginning of 2009 spread across our entire spectrum of IT sectors.

M&A multiples have more than doubled since the beginning of the year. In September alone, the biggest deals are boasting LTM EV/Rev multiples of between 3.6x and 17x. As of September 17, the median revenue multiple for deals over $100 million came to 3.1x — a big increase over the 2.5x median multiple for Q2 and 1.5x median multiple for Q1.

Software Transactions Over $100 Million

The most recent deal announcement — Adobe’s acquisition of Omniture, a provider of online business optimization software — has really caused some buzz in the market. The transaction rings in at a deal value of $1.7 billion (a 24% premium) with an enterprise value/revenue multiple of 5x. John Lovett, an analyst for Forrester, believes the deal brings in a new challenger for Web content management providers, while others say the Omniture deal (along with other deal announcements) is a good sign for tech start-ups since acquirers appear to be extending into and finding new markets as well as increasing web presence.

The biggest payout in terms of multiples goes to Intuit and its $170 million acquisition of Mint.com at an EV/Rev multiple of 17x. A day before the Omniture deal broke, CA announced its $200 million acquisition of network performance management provider NetQoS Inc at an EV/Rev multiple of 3.6x. Skype’s $2.7 billion acquisition by Silver Lake Partners (which could now be heading for some lawsuit trouble) is the largest of the deals for Q3, and also boasts a hearty revenue multiple as well at 4.5x.

The market appears to be well off the lows of Q1 and we expect there could be even more activity before Q3 rounds out at the end of the month. While deal volumes for all M&A are still lower (global deal volume as of September 11 was $1.34 trillion, down 37% from the same time last year), the big jump in deal sizes and multiples since the second quarter is a good sign. We believe there will be plenty of room for continued growth through the remainder of 2009 and expect a move to more normalized levels for M&A, particularly in the software sector, in 2010.

While the US has been in the midst of the current financial crisis, much ink has been spilled over the deaths of investment banking behemoths and of Wall Street as we know it. But as Wall Street titans go down one after another, boutique investment banks that specialize in M&A advisory are well-positioned to reap the spoils. Although M&A deals already vastly outnumber initial public offerings as an exit strategy, this spread will likely expand as the market remains hostile to IPOs and more companies see their stock values fall pushing them into the arms of acquisitive tech vendors.

While valuations may fall as a result of the volatility of the stock market, it all may even out as more companies look to be sold to larger technology companies. And those large tech companies are still voracious buyers. As we have noted in a previous blog post, large technology companies such as Microsoft, HP, and Cisco have been taking advantage of the economic downturn by shopping for target companies in order to augment their growth and bolster their product offerings. What’s more, despite the events that have taken place on Wall Street since that post, some tech giants report that their M&A strategy will continue unabated. At OpenWorld, Oracle’s president Charles Phillips, Jr. suggested that Oracle will continue its aggressive acquisition strategy.

While it’s unclear whether the really huge deals (like HP’s $13.9 billion bid for EDS or Oracle’s $7.2 billion acquisition of BEA Systems) will increase or decrease in the current economic climate, it is possible that the next few quarters will see increased M&A activity in the smaller (couple hundred million) deal range. This is the sweet spot for boutique investment banks that specialize in mergers and acquisitions advisory. Additionally, top MBA talent is flocking to boutique investment banks as opportunities for employment dry up at their larger brethren. Armed with top talent and largely insulated from the credit crisis plaguing bigger banks, boutiques may well come out on top during this time of economic uncertainty.

First the good news. Total announced enterprise value of the IT deals tracked by Updata was roughly $31 billion in Q2 2008, up 3% from Q1 2008… read more>>

Economic Downturn Has Not Stopped America’s Acquisitiveness Abroad

In terms of the number of announced transactions in Q2 2008, cross-border deals made up about 39% of all the acquisitions tracked by Updata. Interestingly, fewer of these deals than expected have been inbound to the US… read more>>

Challenging Environment Slows IT M&A Activity Overall

From Updata’s perspective, buyers have become more patient and selective about targets given their increased M&A options… read more>>

SECTOR ANALYSES

Updata regularly tracks five core subsets of the technology sector: Infrastructure Software, Enterprise Application Software, IT Services, Security, and Internet. In Q2 2008 certain sectors fared better than others. Overall, deals in the IT services space made up the bulk of the activity while deals in the Internet sector…read more>>

For much of the 12-month period ended June 30, 2008, M&A deal activity in infrastructure software proved relatively immune to negative trends in the capital markets, systemic problems in the credit markets, and weakening economic conditions in the US… read more>>

Infrastructure software M&A activity was generally strong during the 12-month period ended June 30, 2008. During the year, Updata tracked more than 80 infrastructure software deals aggregating just over $15 billion in transaction value… read more>>

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Signal Hill's blog offers analysis and perspectives written by Signal Hill's investment banking team on M&A across our sectors, as well as our latest published sector insights and company announcements.